Question

Question #4: A Bond is a contract between the issuing organization (corporation or governmental organization) and the bondholder. The terms of the Bond are included in the Bond Indenture, also called the “Deed of Trust”.

Required: Briefly define the following Bond terms

a) Secured bond

b) Sinking Fund

c) Call Provision

Answer 1

A) Secured bonds are those bonds were secured by the collateral and their value of the principal is highly secured because they would be preferred loans as these collaterals will be required to pay off the the creditors of these loans in case of any default of the company and the creditors will be required to sell off assets in order to recover the loan from the company in order of any default by the company on the payment of debt repayment schedule.

B)sinking funds are the funds which have been created by the company in order to set aside certain funds in order to be proactive to repay the loans of the company so the sinking fund will be continuously credited by the company with regular payments accounts in order to protect themselves in order of any emergency so that the sinking fund can help them in order to pay off their loan at the adverse situations.

C) call provision on the loan would be providing an option to the bond issuer because the bond issuer will be embedding a provision with the issuance of the loan that he can call back those loans when he will be finding appropriate and usually these loans are called back by the bond issuer company when they think that the rate of interest which they are paying is generally higher than the prevalent market rate of interest so call provision is a provision embedded with the bond in order to call these bonds.